Finance Ministry Downgrades GDP Growth Estimate

Prague, July 31 (CTK) – The Czech Finance Ministry downgraded a GDP growth estimate for this year in its new forecast to 3.2 percent from 3.6 percent in April, envisaging a 3.1 percent rise for 2019 against its previous estimate of 3.3 percent, the ministry said today.

The economy expanded by 4.3 percent last year, it added.

However, a favourable economic development will continue, said the ministry.

Economic output will be driven by household consumption thanks to wage growth and low unemployment. Investment activity will be boosted by European funding and the companies’ need to upgrade their technologies because of labour shortage in the market.

The Czech economy seems to have reached a peak of the business cycle, and the cabinet should therefore be very cautious when increasing mandatory expenditures so as not to have to raise markedly its debts in hard times and to have money to boost the economy through investments, said National Budget Council chairwoman Eva Zamrazilova.

June’s prediction of the Finance Ministry is the first forecast that will be assessed by the Budgetary Forecast Committee if its targets can be met. A meeting of the ten-strong team of economists, led by UniCredit Bank chief economist Pavel Sobisek, is scheduled for August 8, and its agenda was approved by the cabinet today, said the council’s spokesman Janis Aliapulios.

The average rate of inflation is predicted at 2.2 percent this year, against a 2.1 percent estimate in April. Last year’s average inflation was 2.5 percent.

The rate will also be above the 2 percent inflation target of the central bank in 2019, with the ministry predicting inflation at 2.3 percent.

The ministry envisages slower currency appreciation to the euro – an average exchange rate at Kc25.6/EUR for this year and Kc25.2/EUR for 2019. In April, the ministry expected the crown to firm beyond Kc25 per euro next year.

The economic growth has a favourable impact on public finances that ran a surplus of 1.6 percent of GDP last year, and this year’s projection is a surplus at 1.5 percent of GDP. “Increased consumption of government institutions should be offset by higher tax revenues including social insurance payments,” the ministry said.

Negative factors to influence the Czech economy include an escalation of trade disputes between the USA, China and the EU and problems in the Italian banking sector.

On the domestic scene, it is a lack of workers with suitable qualifications, and ongoing fast rise of housing loans and property prices.

“Renewing an investment cycle tied to the EU’s programming period for 2014 – 2020 will be of key importance for investment activity,” the ministry said.

Today’s prediction is similar to those made previously when the ministry was somewhat more pessimistic about the economic development, said Cyrrus chief economist Lukas Kovanda. It is a good position to defend budget deficits, for example. As seen in recent years, the result is a better state budget performance than foreseen by the ministry, he added.

The Czech Banking Association said last week the economy would expand by 3.3 percent this year and by 2.9 percent next year.

In its May forecast, the central bank envisaged economic growth at 3.9 and 3.4 percent in 2018 and 2019, respectively. A new forecast will be published on Thursday.

The Organisation for Economic Co-operation and Development (OECD) predicted a 3.8 percent rise for this year and a slowdown to 3.2 percent next year.

The International Monetary Fund estimated Czech economic growth at 3.7 percent in 2018 and at 3.2 percent in 2019.